TEACHING THE TAX CODE
June 3, 2009
The Earned Income Tax Credit (EITC) is the largest cash transfer program for low-income families in the United States, and its goal is to increase labor supply and earnings among those households. To achieve those goals, taxpayers must understand how the program applies to them; yet, very few eligible individuals know whether working more would increase or reduce their EITC amount. In addition, they get little feedback about how their behavior affects their EITC refund.
In response, the National Bureau of Economic Research (NBER) conducted a randomized experiment at 119 H&R Block offices in Chicago in 2007 which involved 43,000 EITC claimants. Half of the H&R Block clients were randomly selected to receive a two-minute explanation by their tax professional about how the EITC works.
By tracking the subsequent earnings of the 43,000 clients, the NBER studied how information on the structure of the EITC affected total earnings in the year after the intervention:
- When compared with other policy instruments, providing information has large effects.
- The tax preparers who encouraged taxpayers to maximize the value of their EITC benefits generated the same labor supply response as a 33 percent expansion of the EITC program, while the other preparers induced the same response as a 5 percent tax rate cut.
- It may be surprising that a 2-to-3 minute explanation can have substantial effects on labor supply, but that's the case because the session combines simple information with advice from an expert at precisely a time when individuals are thinking about taxes.
However, the main limitation of this study is that the NBER was not able to characterize the mechanisms through which information and advice affect behavior. Moreover, they were unable to determine how the treatment affected each client's perceptions about the structure of the EITC.
Source: Raj Chetty and Emmanuel Saez, "Teaching the Tax Code: Earnings Responses to an Experiment with EITC Recipients," National Bureau for Economic Research, April 2009.
Browse more articles on Tax and Spending Issues